The Fiscal-Cliff Bowl: A Viewer’s Guide

Finally, the end game has begun—a contest of will and tactics that has been coming for months. With the deadline for the expiry of the Bush tax cuts and the imposition of automatic spending cuts set for midnight on Monday, the two sides have started talking again, and President Obama has said he is “modestly optimistic” that a deal can be done. Senate Minority Leader Mitch McConnell, a new player in the negotiations, said on Friday night that he and Speaker John Boehner will keep talking with the Democrats over the weekend, in the hopes of coming forward as early as Sunday with a proposal they can present to their members.

At this stage, there isn’t much to be gained in trying to predict what will happen. Some observers reckon the last-minute talks will yield a meaningful agreement. Other people, including some of those involved in the negotiations, think the chance of a serious deal has already passed, and what is happening now is largely an exercise in trying to blame the other fellow for the inevitable failure. Even if there is a deal, it is likely to be much smaller than was originally anticipated. Congress would pass a bill extending the Bush tax cuts for those earning less than a certain threshold, and raising the rates paid by those who earn above that figure. But with the two sides still far apart on spending, the other component of the cliff, the automatic spending cuts, would remain in place, at least for now.

The entire process has been dispiriting, if predictable, and at this stage most Americans are simply hoping it will be over soon. Still, for those of you who prefer politics to college football here are a few things to watch (and help you keep score) over the next forty-eight hours. If the Fiscal-Cliff Bowl isn’t exactly Alabama versus Notre Dame, there are still plenty of matters of import to be decided.

1. The top rate of income tax.

At the moment, it is thirty-five per cent. Obama has been calling for it to be raised to the Clinton-era level of 39.6 per cent. But there have also been suggestions that in order to get a deal he would accept a lower figure —perhaps thirty-seven per cent or 37.5 per cent. Setting the top rate at such a figure would establish the principle that the rich pay a bit more, but it would also raise less revenue and amount to a clear concession to the Republicans.

2. The top-rate threshold.

Obama campaigned on raising taxes on everybody who earns more than two hundred and fifty thousand dollars a year. In the pre-Christmas negotiations, he agreed to up that figure to four hundred and twenty-five thousand dollars. Now, there is talk of the figure being raised again, perhaps to five hundred thousand. For revenue and equity reasons, the numbers matter. If the threshold is set at Obama’s original figure, close to three million taxpayers will face higher rates. With a threshold of five hundred thousand dollars, fewer than one million taxpayers would be affected. The higher the figure, the more Obama has given up to the Republicans in order to get an agreement.

3. Social Security.

If reforming Social Security is part of the deal, it will be another victory for the Republicans. The White House has floated the idea of changing the way the inflation rate is calculated for the purposes of setting benefits, a covert way of reducing future payments to retirees. Liberal Democrats have pushed back against this idea, but some reports say the White House hasn’t dropped it. With Republican leaders eager to show they have extracted concessions from the talks, this could be another one.

4. Unemployment benefits and payroll tax cuts.

As part of its policy package to alleviate the recession, the Obama Administration extended the period for which out of work people can claim benefits and cut the payroll tax. Both measures are due to expire on December 31st. The White House appears to have given up hope of getting the payroll tax cut reïnstated for 2013, but it is pressing the Republicans to agree with another extension of unemployment benefits. Since these are both measures that primarily impact middle-class Americans, and provide support for overall demand in the economy, the way they are resolved is important.

5. Total revenues raised.

In order to get the debt-to-G.D.P. ratio on a sustainable path, the budget arithmetic (not wholly reliable) suggests we need about another $2.5 trillion of deficit reduction over the next ten years. (Thanks to the Budget Control Act of 2011, Congress has already mandated about $1.5 trillion of cuts.) Obama has proposed making the new package a one-for-one split: half increased revenues and half spending cuts. The Republicans are pressing for more cuts and less revenue, although, in the talks before Christmas, Boehner did reportedly agree to a figure of a trillion dollars in new revenues.

6. The debt ceiling.

It’s due to be breached again sometime soon, in February probably. The White House was hoping to get the Republicans to agree to raise it as part of the agreement, but this idea appears to have been dropped, which is bad news. Unless the debt ceiling is raised in advance, the country faces another potential fiscal crisis in just a few weeks—and one that could be much more serious than the current one. The financial markets may be willing to overlook partisan squabbling about a self-imposed and artificial deadline like the fiscal cliff. They are likely to react badly to even the possibility of the U.S. Treasury defaulting on its debts.